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Radhey Shyam Sri Krishna v. Commissioner Of Income-Tax
Factual and Procedural Background
Messrs Radhey Shayam Shri Krishna was a registered partnership firm originally consisting of Sheo Kant and his two sons, Radhey Shyam and Shri Krishna. After Sheo Kant's death on October 11, 1967, his widow and two sons became partners under a fresh partnership deed executed on November 1, 1967. For the Assessment Years 1969-1970 and 1970-1971, the firm claimed deductions for interest paid on capital amounts credited to the accounts of the two male partners, Radhey Shyam and Shri Krishna. The Income-tax Officer rejected these claims, holding that the interest payments were made to individual partners, which was not allowable.
On appeal, the Appellate Assistant Commissioner held that the capital inherited by the sons was ancestral property belonging to their respective Hindu Undivided Families (H.U.F.) and allowed the interest deduction accordingly. The Commissioner supported this view, noting that the reversal of entries in the firm's books to reflect the H.U.F. ownership was correct.
The Income-tax Officer appealed to the Tribunal, which reversed the lower authorities' decisions. The Tribunal held that the inherited money was the individual property of the sons, and the reversal entry was an afterthought. Consequently, the interest payments were deemed to have been made to individual partners, disallowing the deduction. The assessee then referred a question of law to the court.
Legal Issues Presented
- Whether the capital received by the sons of Shri Sheo Kant Misra on partition after his death constituted their individual property or ancestral property held in their capacity as heads of their respective Hindu Undivided Families.
- Whether the subsequent reversal of entries in the firm's books to reflect the capital as belonging to the H.U.F. was an afterthought.
- Whether the payment of interest on these capital accounts was a permissible deduction under the Income-tax laws.
Arguments of the Parties
Appellate Assistant Commissioner's Arguments
- The money inherited by the two sons was ancestral property in their hands qua their own sons, i.e., it belonged to their respective Hindu Undivided Families.
- Since the capital belonged to the H.U.F., interest paid on it was allowable as a deduction because it was not paid to the individual partners but to the H.U.F. through their Karta.
- The reversal of entries in the firm's books transferring capital from the sons' individual accounts to their respective H.U.F. accounts was legally justified to reflect the true nature of ownership.
Income-tax Officer and Tribunal's Arguments
- The money inherited by the sons was their individual property, not ancestral property.
- The reversal of entries in the firm's books was an afterthought and did not reflect the true ownership.
- The interest payments were therefore made to individual partners, which is not allowable as a deduction.
Table of Precedents Cited
No precedents were cited in the provided opinion.
Court's Reasoning and Analysis
The court rejected the Tribunal's view that the inherited money was self-acquired or individual property of the two sons. It relied on the principle that, in law, such inherited property remains ancestral in the hands of the sons qua their own sons, as explained in paragraph 223 of Mulla's Hindu Law. The court clarified that Section 19(b) of the Hindu Succession Act, 1956, which prescribes the mode of succession as per capita and as tenants-in-common, does not alter the fundamental nature of the property as ancestral. The abolition of coparcenary status does not change the ancestral character of the property in the hands of the sons for their descendants.
Accordingly, the capital contributed by the two sons to the firm was money belonging to their respective Hindu Undivided Families, with the sons acting as Karta. The partnership deed required the sons to bring in capital to become partners, and this capital represented their contribution. Whether the capital was held individually or as H.U.F. property did not change the fact that the interest was paid on capital contributed by partners of the firm.
The court found that attempts to show the interest payments as made to a creditor rather than a partner were immaterial because the underlying capital belonged to the partners. Therefore, the payment of interest on these capital accounts was not a permissible deduction under the Income-tax laws.
Holding and Implications
The court held that the payment of interest on the capital accounts of Radhey Shyam and Shri Krishna was not a permissible deduction for the firm.
The decision favored the Department and against the Assessee. The direct effect of this ruling is that the firm's claim for deduction of interest paid on the capital contributed by the two partners was disallowed. The court noted the divided success of the parties and ordered that each party bear its own costs. No new legal precedent beyond the application of established principles of Hindu law and partnership law was set by this decision.
Satish Chandra, J.:— Messrs Radhey Shayam Shri Krishna was a registered firm. It consisted of Sheo Kant and his two sons Radhey Shyam and Shri Krishna as the three partners, Sheo Kant died on Oct. 11, 1967 leaving as his heirs his two sons and his widow. The firm was reconstituted by execution a fresh partnership deed on Nov. 1, 1967. In this firm, the two sons and the widow became partners. For the Assessment Year 1969-1970, the firm claimed deduction of Rs. 6,2260/- on the ground that it paid this amount as interest to each of the two male partners. Likewise, a sum of Rs. 6,648/- was claimed in respect of the Assessment Year 1970-1971.
2. This is not disputed that the firm paid the interest in dispute on the investment brought in by the two partners Radhey Shyam and Shri Krishna and the payment of interest was made by crediting their accounts. The Income-tax Officer rejected the claim for deduction. He held that after the death of the father, the sons got the share of the capital in their individual capacity and that, therefore, the payment was, in substance, to the partners of the firm which was prohibited.
3. On appeal, the Appellate Assistant Commissioner took a different view. He held that, in law, the money inherited by the two sons Radhey Shyam and Shri Krishna was ancestral property in their hands qua their own sons and that, therefore, the money inherited by the two sons belonged to their Hindu Undivided Family in law. The interest paid on the amount which belonged to the H.U.F was allowable because it could not be said that the interest was paid to the partners because the partners were individuals and not the H.U.F through their Karta. At this stage, it may be stated that initially the amount of capital inherited by the two sons was entered in the books of the firm in their individual capacity. Subsequently, it was transferred to the account of their respective H.U.F in the books of the firm. The Commissioner held that this reversal or adjustment entry was done correctly in view of the true legal position. He, therefore, allowed the appeal pro tanto.
4. The Income-tax Officer went up to the Tribunal. The Tribunal, held that the money inherited by the two sons remained their individual property. Their own sons had no interest in it. They, therefore, invested their own moneys as capital in the reconstituted firm. The reversal entry was held to be an afterthought. On this view which in substance, amounted to saying that the payment of interest was, in truth, to the partner. The appeal was allowed and the Income-tax Officer's order was upheld.
5. At the instance of the Assessee, the Tribunal has referred the following question of law for our opinion:—
“Whether, on the facts and in the circumstances of the case, the capital received by the sons of Shri Sheo Kant Misra on partition after his death constituted their individual properly and the subsequent reversing of the entries made in the books on April 4, 1968, was an afterthought and the payment of interest on these capital accounts was not a permissible deduction?”
6. We are unable to uphold the view of the Tribunal that the money inherited by the two sons from their father was their self-acquired or individual property. In law, it was ancestral property in their hands qua their sons. The position is made clear by para 223 of Mulla's Hindu Law. The Tribunal has referred to a footnote which says:
“Where a number of sons inherit their father's self-acquired property; they hold it as joint family property. But now see Section 19(b) of the Hindu Succession Act, 1956.”
7. S. 19(b) does not change the basic principle that the nature of “ancestral property remains the same to the heir who inherits it from his father provided he has sons. S. 19(b) lays down the mode of succession whether it will be per capita or per stirpes. It says that if two or more heirs succeed together to the property of an intestate, they shall take the properly, (a) save as otherwise expressly provided in this Act, per capita and not per stirpes; and (b) as tenants-in-common and not as joint tenants. The Tribunal laid emphasis on the fact that they had taken the property as tenants-in-common. This only means that the coparcenary nature of the family is abolished. They took as joint tenants because they were treated, as members of the Hindu coparcenary. Under Hindu Succession Act, they have to take their individual interests as ascertained at the moment of inheritance. But this mode of succession does not touch the true nature of the inheritance by the sons. The nature of the property in their hands continues to be ancestral qua their own off springs. Therefore, in law, the correct position was that the amount inherited by the two sons was ancestral in their hands qua their sons. In other words, the amounts belonged in law to the respective H.U.F headed by each of the two sons Radhey Shyam and Sim Krishna. In this view, the making of the reversal entry was quite justified because obviously the two sons wanted the true legal position to the reflected in the books of accounts.”
8. But this does not improve the position of the assessee. It is now undisputable that the capital contributed by the sons was the money inherited by their H.U.F The capital standing to the credit of their names in the firm's books was, in fact, money belonging to the H.U.F of which these two sons were the Karta. Para 4 of the partnership deed provided that the capital of partners Nos. 1 and 2 shall be such as may be invested by each of them according to the needs of the business and the capital of the third party, namely, the widow, shall be such as she should be entitled to receive as her share in accordance with the wishes of late Sheo Kant, her husband. It is thus clear that the two sons were bound to bring in capital before they could become partners. In other words, they were recognized as partners because they were to bring capital. So far as the firm was concerned, this money represented the capital contribution of the two partners. If the partners were individuals, then the capital account belonged to the individuals. No matter whether in fact or in law the money may have belonged to the H.U.F which they might have brought in the other way of looking at it could be that since the entire contribution of each of these two partners was money belonging to the H.U.F, in law the H.U.F was the partner of the firm represented by their Kart as.
9. Looked at from any point of view, the interest was paid on the capital contribution of the partners of the firm. That being the legal position, making entries in a way that the payment of interest may be shown to a person as a creditor would not make any difference, because interest was paid on the capital contributed by a person who was a partner of the firm.
10. In this view, we answer the question referred to us by holding that the payment of interest on these capital accounts was not a permissible deduction, and in favour of the Department and against the Assessee. In view of the divided success, parties will bear their own costs.
11. Answered accordingly.
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